Options Trading Strategies: Protective Call
The opposite position to the protective put strategy, the protective call is also a hedging strategy in which you hold a short position on the underlying asset, and buy an At The Money or Out of The Money call options to protect against the price rise of an underlying asset.
The protective call strategy is also called a synthetic long put, as its profit and loss profile is the same as the long put strategy.
When to use this strategy?
You are bearish and hold a short position on the BTC/ETH expecting the price to fall. You will buy a call option to protect your unrealized gains if the price of BTC/ETH rises. Therefore, you will use the protective call strategy during times of the market unpredictability. Your selection of the long call strike price should be less or equal to the entry price of the short position.
Below is a Profit and Loss chart example of the protective call options strategy:
Pros:
The loss is limited if the price rises, and potential profit is unlimited if the price falls.
Cons:
The strategy is more complex than simply buying puts. Also, potential high premiums for buying calls can reduce profit.
Example:
In this example, BTC is trading at 43,541.43 USD, and you expect its price to fall. You have shorted (sold) BTC at 43,600.00 USD and bought an ATM call with a strike price of 44,000.00 USD, with an expiration date of February 12th 2022, and for a premium of 302.28 USD.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the strike price, the call option will expire worthless, having in mind that at the break even point you are starting to make profit.
If the spot price is above the break even price you are starting to make losses.
If the spot price ends up at or above the strike price you will experience the max loss which is equal to premium plus the strike price minus the price at which you have shorted BTC.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 40,917.00 | +2,380.72 |
| 41,536.00 | +1,761.72 |
| 42,382.00 | +915.72 |
| 43,067.00 | +230.72 |
| 43,297.72 (break even) | 0 |
| 43,490.00 | -192.28 |
| 43,716.00 | -418.28 |
| 43,895.00 | -597.28 |
| 44,000.00 (strike price) | -702.20 (max loss) |